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Friday, September 3, 2010

The chart pattern of the Shanghai Composite index played hide-and-seek with the entangled 20 day and 50 day EMAs and finally ended the week with a 45 points gain on a weekly basis. The week’s skirmish was won by the bulls.

Could this be a prelude to a strong rally? There are no real signs of it yet, though the technical indicators are mildly bullish. The slow stochastic and RSI are just above their 50% levels. The ROC is at the ‘0’ level. The MACD has moved up a little to touch the falling signal line.

As long as the Shanghai Composite remains below a falling 200 day EMA, the bear market will continue. The index has been in a narrow trading range of about 100 points for the past month, and the likely break out from the range should be upwards.

Will the bulls be able to gather enough momentum to move the index above the resistance of the 200 day EMA? The recent lower bottoms in the slow stochastic, RSI and ROC may spoil bullish hopes.

Hang Seng index chart

The chart pattern of the Hang Seng index shows why awaiting technical confirmations is the safer route in investing. In last week’s analysis, I had observed that the index had fallen below the 200 day EMA, and the weak technical indicators had hinted that the 20 day and 50 day EMAs would follow suit.

But the technical confirmation of a bear market never came. The bulls staged a smart rally that saw the index close the week almost 375 points higher at 20971. More importantly, the index closed above all the three EMAs. So is it time to turn bullish?

Not yet. The higher volumes on a down day (Aug 31, ‘10) doesn’t provide the confidence. Also, the index made a higher bottom than the ones in early Jul ‘10, but the four technical indicators made lower bottoms. Negative divergences from all four indicators should not be overlooked.

The slow stochastic and RSI have emerged from their oversold zones. The ROC is rising in the negative zone. So is the MACD, which is below the signal line. The Aug ‘10 high is more than 800 points away. Till that peak is conquered, the threat of a bear attack will remain.

Malaysia (KLCI) index chart

The Malaysia (KLCI) index chart is in a raging bull market, in stark contrast to the struggling Chinese indices. During my previous analysis, the index was looking strongly bullish. This time around, the bullishness seems to be a bit overdone.

All three EMAs are rising, but the index has moved too far above the 20 day EMA. In similar situations earlier, corrections have followed. The rising volumes during the recent up move show that the correction is unlikely to be a deep one.

The slow stochastic and RSI are both in their overbought zones. The RSI rarely spends any time at higher levels – which is another hint of a correction round the corner. The MACD is above the signal line, and rising in positive territory. The ROC is also positive but has stopped rising.

Bottomline? The Shanghai Composite index is in a bear market, but the bulls seem ready for some action. The Hang Seng index almost slipped into a bear market, and some how managed to escape a strong bear grip. For both indices, selling on rises, or holding, may be the better options. The Malaysia (KLCI) is in a strong bull market, but looking ripe for a correction. Buy the likely dip.

1 comment:

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